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Dept. of: what were they thinking?

As reported in these articles from the NYT‘s DealBook and Business Insider, the New York State Dept of Financial Services has imposed a $25 million fine on PwC and a two-year ban on its consulting unit. The settlement agreement stated that PwC’s consulting work “did not demonstrate the necessary objectivity, integrity, and autonomy” required for consultants, although apparently no legal violation was found.

A consulting unit of PwC was engaged to conduct a review of and quantify improper payments made to sanctioned countries, such as Iran and Sudan, by the Bank of Tokyo-Mitsubishi for the purpose of self-reporting and helping to.determine the extent of the fine to be imposed on the Bank. According to the NYT, the Bank selected and paid for the consultant performing the review. In the course of its review, PwC became aware that the Bank had a policy to strip wire messages of information related to sanctioned countries and included these instructions in its administrative procedures manual for foreign transfers. In drafting its report, PwC stated that, had it known about this instruction, it would have “used a different approach” and recommended at the beginning of the review process that there be a forensic review of the Bank’s wire transfers. According to the settlement, the Bank asked PwC to remove this language, and PwC said… OK. Instead, it inserted language, virtually dictated by the Bank’s counsel, that said the opposite — that the instructions would not have impacted the completeness of the data and that PwC’s methodology was appropriate. PwC also deleted or watered down a number of other statements, at the Bank’s request, to make its report more anodyne. In the settlement agreement, one of PwC’s group leaders is quoted making a number of statements, which the settlement characterizes as revealing that he “elevated his apparent concern for client satisfaction over the need for objective inquiry. [He] repeatedly suggested in emails that further analysis in certain areas might reveal wrongdoing by the [Bank] and was therefore best avoided.” The settlement notes that PwC failed to repudiate his statements and later promoted him (although, upon learning of the misconduct, his comp was cut by 20%). Both the lead partner and supervising partner have retired. The NY state superintendent of the department commented: ” ‘When bank executives pressure a consultant to whitewash a supposedly ‘objective’ report to regulators — and the consultant goes along with it — that can strike at the very heart of our system of prudential oversight….’ ”

Perhaps best not to be too sanctimonious here. To be fair, we’re given only one side of this story: there’s no real discussion in the settlement of whether or not PwC had any justification for its position that it may have believed at the time to be reasonable or even compelling, and which could have made steering the correct course more complex than it appears in the settlement.

One interesting historical aspect, reflecting the variety of interests at stake, was reported by the NYT:

Much was riding on the consultant’s work. The assignment came on the heels of state and federal authorities imposing a regulatory order on the bank, saying it “failed to implement adequate” safeguards to detect suspicious money transfers. And before pursuing new acquisitions in the United States, the bank needed to put those regulatory problems behind it.

Ultimately, in late 2008, authorities lifted that regulatory order. That cleared the way for the bank to take a $9 billion stake in Morgan Stanley, which at the time — in the depths of the financial crisis — was teetering on the brink of collapse.

For the sake of Morgan Stanley and the broader financial system, regulators were not looking to undermine the deal. And yet, if PricewaterhouseCoopers had not changed its report about the bank, regulators might have lacked the confidence to allow the Morgan Stanley deal to proceed, potentially altering the course of Wall Street history.